Dr. Haider Shah

Opinion is the medium between knowledge and ignorance (Plato).

Can our economy afford the Raymond jolt? February 28, 2011 Daily Times

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VIEW: Can our economy afford the Raymond jolt? —Dr Haider Shah

In Pakistan, with an elitist economy where the tax-GDP ratio of nine percent is one of the lowest in the world, and where it shows avowed reluctance to rationalise its military ambitions, regular bailouts should not come as a surprise

The health indicators of the Pakistan economy have not been encouraging ever since signs of ill health became evident in 2007. Economic woes are, however, meshed with other socio-political problems of all sorts. On top of that, Pakistan has also been unlucky in experiencing both natural and man-made disasters. Now Pakistan’s economy is threatened with a tsunami of a different sort. While the country has hardly recovered from the mayhem after the tragic murder of Salmaan Taseer, Mr Raymond Davis suddenly appears in Lahore as a bolt from the blue. Legal and justice issues aside, the incident could not have occurred at a more inappropriate time. The conspiracy theorists might say that Pakistan is using Raymond Davis for increasing the stakes and thus be able to bargain for bigger economic and military aid from the US. Either way the repercussions of this incident do not augur well. Religious parties and the media are all set to milk this opportunity on Raymond’s release. If not released, the backlash from the US can be severe. We need to understand our economic situation well before engaging ourselves in the self-gratifying sport of jingoism.

Due to the international economic meltdown many countries, developing and developed, are in hot water. Pakistan is thus not the only country that is experiencing economic distress as rightly commented by Sayeeda Warsi, Chairperson of the ruling Conservative party in the UK during her recent visit to Pakistan. For instance, weaker economies of the Eurozone such as Portugal, Ireland, Italy, Spain and Greece are finding it difficult to balance their fiscal books. The beleaguered Greek government told its nation that it had to make a choice between ‘collapse or salvation’. The story of Ireland is also not much different. Swallowing its national pride, the country had to accept a $ 89.4 billion bailout loan with tough conditions attached.

When countries live beyond their means, sooner or later they need to be bailed out. In Pakistan, with an elitist economy where the tax-GDP ratio of nine percent is one of the lowest in the world, and where it shows avowed reluctance to rationalise its military ambitions, regular bailouts should not come as a surprise. As once Keynes stated, “In the long run we are all dead”, Pakistani economic policy managers have always remained preoccupied with short-term survival strategies. Right now, they are faced with a difficult task. The fiscal deficit, the gap between receipts and expenditure, remains high and consequently debt is piling up rapidly. Growth projections according to the recent State Bank forecast are low, i.e. 2-3 percent. The budget deficit is projected to be 6-6.5 percent as opposed to the original budget target of four percent. While exports are expected to grow, imports will offset any growth and thereby increase the current account deficit. The unemployment rate is shooting up and inflation is becoming feverish and is set to remain between 15-16 percent. Our economic policy managers have been relying too much on monetary measures to contain inflation but such measures are only effective in the short run and can be offset by other structural problems. Prior to the floods, there were some encouraging signs of recovery but the flood situation in summer last year again proved that Pakistan’s economy is too fragile and a single disaster can upset the whole applecart.

After Hillary Clinton, Saeeda Warsi is the second foreign dignitary that has publicly advised Pakistan to rationalise its economic policy. She says it with merit and conviction though. In the UK, the new coalition government has also taken tough measures to address the fiscal deficit left behind by the booming times of the New Labour government. The large scale spending cuts have not even spared the armed forces and together with scrapping of expensive projects, a large number of servicemen have also been laid off. Similarly, despite massive student protests, the tuition fees for university education were significantly increased. On the tax revenue side VAT rate was increased to 20 percent. Our government, on the other hand, has not yet found the courage to take difficult decisions. Instead, as a short term survival strategy, it approached the IMF in 2008 for a bail-out package. Like Greece and Ireland, Pakistan also had to make a pledge that it would live within its means. In December 2010, after dilly dallying, Pakistan was in no position to meet the IMF performance criteria and, therefore, requested a nine month extension of the standby arrangement. Pakistan essentially made four written pledges in that letter. One, it would implement RGST, two, it would achieve the budget deficit target of 4.7 percent, three, it would carry out extensive energy sector reforms and four, it would introduce essential reforms in the financial sector.

A successful reform policy needs both sincerity and continuation. The PML-N’s initiative of the 10-point agenda calling for lean, efficient and accountable government and the joint task force of government and opposition were steps in the right direction. As the 45 days ultimatum period given by the PML-N expired and the two major parties appear to be parting ways, there are renewed concerns that amid political brawls, the seriously ill economy will remain unattended. The saner elements in the opposition must realise that if they try to make some political capital out of the situation today, they will find the waters much hotter when they run the government tomorrow. Tough decisions cannot be indefinitely delayed, as in future they would become even more painful. No one can deny the importance of minimising corruption and making our taxation system more equitable. However, these calls should not be seen as an alternative but should rather be complementary to the task of increasing the tax revenue and documenting the economy with the help of a VAT-style sales tax system.

As if our problems were not already mammoth in size, now we have to deal with the Raymond Davis affair. One hopes that our decisions are not led by populist desires but by pragmatism and established international practices. The fallout of adventurist causes hits the sidelined poor of Pakistan more even though such causes are championed mostly by affluent ex-civil and military bureaucrats or heftily paid opinion-makers in the media.

Author: Dr. Haider Shah

Academic, Researcher and Writer

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